Sovereign and corporate credit risk: Evidence from the Eurozone

Article history: Received 11 September 2014 Received in revised form 17 April 2015 Accepted 25 April 2015 Available online 2 May 2015 Westudy the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign credit spreads is associated with a statistically and economically significant increase in corporate spreads and, hence, firms' borrowing costs. A deterioration in a country's credit quality affects more adversely firms that aremore likely to benefit fromgovernment aid, thosewhose sales aremore concentrated in the domestic market, and those that rely more heavily on bank financing. Our findings suggest that government guarantees domestic demand, and credit markets are important credit risk transmission mechanisms. © 2015 Elsevier B.V. All rights reserved. JEL classification: G01 G15 G32